How to give away software with successive versions

Free software offer as a promotional tool has been employed by software firms of all sizes. In this research, we propose an extended multi-generation diffusion model that separates substitution from switching, and develop methodologies to help a firm determine the optimal number of free adoptions for each version. Our analyses show that due to the word-of-mouth effect, free offer can help increase a firm's total profit for all versions of a product. Furthermore, we find that in the presence of low-valuation free adopters, the optimal number of high-valuation free adopters decreases, the total number of free adopters increases, and the total profit improves substantially as a result.